Test Two Flashcards
What is the flow of costs?
Indirect Costs -> Cost Pool / Cost Allocation = Costs Allocated
Job Costing
Unit or multiple units of distinct product/service
Process Costing
Masses of identical or similar units of product/service
Five-Step Decision Making Process
- Identify Problem & uncertainties
- Obtain Info
- Predict the future
- Choose among alternatives
- Implement, evaluate, learn
Actual Costing
Direct costs are based on actual direct costs rates and actual quantities
Indirect costs are based on actual indirect cost rates and actual quantities
Normal Costing
Direct costs are based on actual direct costs rates and actual quantities
Indirect costs are based on budgeted indirect cost rates and actual quantities
Absorption Costing
ALL manufacturing costs
(fixed and variable) are
included as inventoriable
costs
DM + DL + VOH + FOH
Highest COGS
No Period Costs
Variable Costing
ALL variable manufacturing costs (direct and indirect) are included as inventoriable
costs
ALL fixed manufacturing costs are treated as period
costs
DM + DL + VOH
Between Absorption and Throughput
FOH is a period cost
Throughput costing
ONLY direct materials costs
are included in inventoriable
costs
ALL other costs (labor, overhead, etc.) are treated
as period costs
DM only
DL + VOH + FOH are period costs
Lowest cost of goods sold, highest period costs
Job Costing Approach
- Identify Job
- Identify Direct Costs
- Select Indirect Cost Allocation Base
- Identify Indirect Costs
- Compute Indirect Cost Rate
- Compute Indirect Cost Allocation
- Compute Total Costs
Cost Pool Definition and examples
Grouping of actual or budgeted individual indirect cost items
Manufacturing Overhead
Depreciation
Indirect Materials
Indirect Labor
Cost Allocation Base Definition and examples
Systematic way to link
cost pool to cost object
Direct Labor Hours
Machine Hours
Direct Materials
Revenues
Units produced
Cost Allocation Rate Definition and formula
Rate at which indirect costs are allocated to a cost object for a given allocation base
Cost Pool / Cost Allocation Base = Cost Allocation Rate
Fixed Overhead Allocation Rate Formula
Budgeted Fixed Manufacturing Costs / capacity (Units, Machine Hours, etc.)
Theoretical Capacity
level of capacity based on producing at full efficiency all
the time
Supply based
Highest production estimate
Practical Capacity
level of capacity achieved when the theoretic capacity is reduced by assuming some unavoidable production delays
Supply based
Between theoretical and normal
Normal Capacity
level of capacity that satisfies average customer demand over a several year period that includes seasonal, cyclical, and trend factors
Demand Based
Bottom two capacity estimate
Master-Budget Capacity
level of capacity that managers expect for the current
budget period (typically 1 year)
Demand Based
Bottom two capacity estimate
Job Costing Direct Material Cost Journal Entires
Debit: Materials Control
Credit: Cash (Accounts Payable)
Debit: Work in Process Control
Credit: Materials Control
Job Costing Direct Labor Cost Journal Entiry
Debit: Work in Process Control
Credit: Cash (Accounts Payable)
Job Costing Indirect Materials Journal Entry
Debit: Manufacturing Overhead Control
Credit: Materials Control
Job Costing Indirect Labor Journal Entry
Debit: Manufacturing Overhead Control
Credit: Cash (Accounts Payable)
Job Costing Depreciation Journal Entry
Debit: Manufacturing Overhead Control
Credit: Accumulated Depreciation
Job Costing Utilities/Insurance/Other Journal Entry
Debit: Manufacturing Overhead Control
Credit: Cash (Accounts Payable)
Job Costing Allocation Overhead Journal Entry
Debit: Work in Process Control
Credit: Manufacturing Overhead Allocated
Manufacturing Overhead Allocated is a contra-asset
Allocated based on overhead application rate given Actual cost allocation base usage
Job Costing Finished Goods Journal Entries
Debit: Finished Goods Control
Credit: Work in Process Control
Debit: Cost of Goods Sold
Credit: Finished Goods Control
Adjusted Allocation Rate End of Period Adjustment
Restate ALL overhead allocation entries in the GL using actual overhead, instead of budgeted cost rates
Results in adjustments to all inventory and COGS amounts
This approach is timely and allows for normal allocation
throughout the year and then an easy “true-up”
Makes adjustments to BOTH the job cost record and the
GL/Income Statement
Proration Approach End of Period Adjustment
Spreads any under/overallocated overhead across WIP, Finished Goods, and COGS proportionally – but only on Financials/GL
Allocates based on period-end or year-end balances (either
totals, or specific allocated overhead balances)
Take total book value of work in process, finished goods, and cost of goods sold. Find the percent of the total. Multiply percent by adjustment necessary.
Write-off to COGS End of Period Adjustment Journal Entry and Definition
Debit: COGS
Credit: Manufacturing Overhead Allocated
Typically used when over/under allocation is small relative to
income levels
Production Volume Variance Formula
Budgeted Fixed Overhead - Allocated Fixed Overhead
How do you clear Manufacturing Overhead Control?
Credit Manufacturing Overhead Allocated for the specific job
Major difference between Job Costing and Process Costing
Major difference between the two is how much we average costs over the units of production
What are the two costs in Process Costing?
Direct Materials
Conversion Costs - direct labor & overhead
How does the time of input of costs in process costing affect valuation?
The time of input changes the equivalent units when a good is still in work in process
5-Step Process Costing Process
- Summarize Flow of Physical Units
- Compute Output in Equivalent Units
- Summarize Total Costs to Account For
- Compute Unit Cost per Equivalent Unit
- Assign Total Costs to Completed and Uncompleted Units
Equivalent Units Definition
are a derived measure of output calculated by taking the quantity of each input in units
completed and incomplete WIP and converting the quantity of input into a “theoretical” number of completed units
Direct Materials Process Costing Journal Entry
Debit: Work in Process – Mixing
Credit: Cash (Accounts Payable)
Conversion Costs Process Costing Journal Entry
Debit: Work in Process – Mixing
Credit: Various Accounts (Cash, A/P, Depreciation, etc.)
Transfer from Mixing to Bottling Process Costing Journal Entry
Debit: Work in Process – Bottling
Credit: Work in Process – Mixing
Effect of Conversion Percentage Underestimate
Cost of Goods Sold is Higher
Effect of Conversion Percentage Overestimate
Cost of Goods Sold is Lower
Weighted Average Method Process Costing Definition and EU Formula
Calculates cost per Equivalent Unit of all the work done to date
EUs Completed & Transferred + EUs in Ending WIP
FIFO Process Costing Definition
1) Assigns costs of previous period WIP to first units completed
2) Assigns costs of EUs worked on during current period first to complete beginning WIP
3) Assigns costs of EUs worked on during current period next to start/complete new units
4) Assigns costs of EUs worked on during current period last to ending WIP
Under FIFO, work done on beginning WIP is kept separate from work done during current period
Costs per EU are only calculated using costs from current period and EUs of work started during the period
Comparison of Weighted Average and FIFO for Process Costing
Weighted Average
Pros: Easy to Calculate, More Representative average unit cost when prices fluctuate
Cons: Makes difficult period to period comparisons of costs
FIFO
Pros: Info on costs in current & prior periods, better evaluate firm performance to budget
Cons: More complex calculation
Percent of Completion for Transferred in Costs
100%
Hybrid Costing System Definition
blends characteristics from both job-costing and
process-costing systems
Operations-Costing System
is an example of a hybrid costing system that
can be applied to batches of similar, but not identical, products
Specifically identifies Direct Materials used, but
allocates conversion costs by process
Activity-Based Costing System Definition
refines a costing system by identifying individual activities as the fundamental source of indirect costs
An Activity is an event, task, or unit of work with a specified purpose (e.g., designing product, operating machines, or distributing product)
Product-cost cross-subsidization Definition
is the idea that if a company undercoats one
of its products, it must overcost another product
Refining of a Cost System process
Replace use of broad-based averaging with more precise measurement of indirect costs
Demand for refined cost systems has been driven by:
1) Increase in diversity of products
2) Increase in indirect costs with different drivers
3) Increase in competition in the market
To refine a cost system:
1) Trace more costs as direct costs
2) Increase number of cost pools
3) Increase number of cost drivers
Cost Hierarchy Definition
categorizes cost pools on the basis of
different cost drivers, or degree of difficulty in determining a cost/cost driver relationship
1. Output unit-level Costs
2. Batch-Level Costs
3. Product Sustaining Costs
4. Facility Sustaining Costs
Output unit-level Costs Definition and Ranking
Costs of activities performed that vary with each unit of cost object
Examples: Machine Costs
Most exact
Batch-Level Costs
Costs of activities that vary with a group of units of the cost object
Examples: Setup Costs, QC Costs
Second most exact after output unit-level
Product Sustaining Costs
Costs of activities undertaken to support individual products/services, regardless of units or batches
Example: Design Costs, Engineering Costs, Storage Costs
Second most broad after Facility Sustaining
Facility Sustaining Costs
Costs of activities that can’t be traced to individual cost objects
Example: Insurance, Rent Expense, Depreciation, etc.
Most broad
Who Benefits from Activity Based Costing
Companies allocating significant indirect costs across 1 or 2 cost pools
All or most cost pools are identified as output unit-level costs
Products make diverse demands on resources
Products show small profit margins on products they are well-equipped to make
Substantial disagreement exists with reported costs of manufacturing and marketing products
Costs of Activity Based Costing
ABC requires A LOT of calculation
ABC requires frequent updates to rates/calculations
As cost pools increase, increased chance of misallocating costs
If incorrect, or imprecise cost-allocation bases are used, could result in inaccurate/misleading costs
Substantial disagreement exists with reported costs of manufacturing and marketing products
Activity Based Management Definition
is the method of management decision making that uses activity based costing information to improve customer satisfaction and profitability
Pricing & Product Mix
Cost Reduction & Process Improvement
Design Decisions
Planning & Managing Activities
Cost Reduction & Process Improvements Examples
Allows managers to focus on how and where to reduce costs
Can set cost reduction goals by activity
Focus on removing “non-value add” costs
Design Decisions from Activity Based Management Examples
Can company find ways to decrease complexity
Will customers pay for “less-complex” product
Planning & Managing Activities from Activity Based Management Examples
Managers compare budgeted to actual to evaluate how well activities were managed
Cost of Quality Definition and Costs
system is a methodology that allows an organization
to determine the extent to which its resources are used for 1) activities
that prevent poor quality, 2) activities that appraise quality of products,
and 3) activities that result from internal and external failures
- Appraisal Costs - Conformance Costs
- Prevention Costs - Conformance Costs
- External Failure Costs - Non-conformance Costs
- Internal Failure Costs - Non-conformance Costs
Appraisal Costs Definition and Exampels
are associated with measuring and monitoring activities related to quality
Product Testing
Verification of Materials
Quality Control Procedures
Conformance Cost
Prevention Costs Definition and Examples
are costs incurred to prevent or avoid quality
problems
Equipment Maintenance
Employee Training
Quality Planning
Conformance Cost
External Failure Costs Definition and Examples
are costs incurred to remedy defects discovered
by customers
Repairs and Servicing
Warranty Claims
Complaints
Returns
Non-conformance costs
Internal Failure Costs Definition and Examples
are costs incurred to remedy defects discovered
before the product or service is delivered to the customer
Spoilage
Scrap
Rework
Non-conformance costs
Spoilage Definition and Formula
refers to units of production that do not meet the specifications required by customers for good units, and are discarded or sold at reduced prices
Total Spoilage = (Beginning WIP+Units Started) - (Units Completed+End WIP)
Scrap Definition
is residual material that results from manufacturing a product
No difference made between normal and abnormal scrap
Scrap is either attributed to a specific job or all jobs
Scrap is either recognized at the time of sale or time of production
NO COST is assigned to scrap
Rework Definition
refers to units of production that do not meet the specifications required by customers, but are subsequently repaired and sold as finished goods
Difference made between normal and abnormal rework
Rework is either attributed to a specific job or all jobs
Normal Spoilage and Journal Entry
is spoilage inherent in a particular production process. This type of spoilage arises even when a process is carried out in an efficient manner, and spoilage costs are included as cost of good units
Abnormal Spoilage
is spoilage that is not inherent in a particular
production process and would not arise under efficient operating conditions, and these costs are not considered inventoriable
Process Costing Journal Entry for Normal Spoilage
There is no entry, treated as a normal cost in WIP
Process Costing Journal Entry for Abnormal Spoilage
Debit: Loss from Abnormal Spoilage
Credit: Work in Process
Job Costing Journal Entry for Normal Spoilage for specific job and all jobs
Specific Job – Normal Spoilage
Debit: Materials Control (@ disposal value)
Credit: Work in Process Control (Job 1)
All Jobs – Normal Spoilage
Debit: Materials Control (@ disposal value)
Debit: Overhead Control (total value - disposal)
Credit: Work in Process Control (total value)
Job Costing Journal Entry for Abnormal Spoilage
Debit: Materials Control (@ disposal value)
Debit: Loss from Abnormal Spoilage (total value - disposal)
Credit: Work in Process Control (total value)
Scrap Journal Entries at Time of Sale for Immaterial Scrap, Material Scrap-Specific Job, or Material Scrap-All Jobs
Immaterial Scrap
Debit: Cash
Credit: Scrap Revenue
Material Scrap – Specific Job
Debit: Cash
Credit: Work in Process Control
Material Scrap – All Jobs
Debit: Cash
Credit: Overhead Control
Scrap Journal Entries at Time of Production for Specific Job and All Jobs
Specific Job
Debit: Materials Control
Credit: Work in Process Control
All Jobs
Debit: Materials Control
Credit: Overhead Control
Scrap When Sold
Debit: Cash
Credit: Materials Control
Scrap When Reused
Debit: Work in Process Control
Credit: Materials Control
Normal Rework Journal Entry for Specific Job or All Jobs
Normal Rework – Specific Job
Debit: WIP Control (Job 1)
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated’
Normal Rework – All Jobs
Debit: Overhead Control
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated
Abnormal Rework Journal Entry
Abnormal Rework
Debit: Loss from Rework
Credit: Materials Control
Credit: Wages Payable (DL)
Credit: Overhead Allocated
Master Budget Definition
is a quantitative expression of a proposed plan of
action by management for a specified period of time and an aid to coordinate what needs to be done to implement that plan
A budget consists of both financial (revenues, expenses, cash flows) and non-financial (production, purchasing, employee) elements
Advantages of Budgeting
● Promotes Coordination and Communication
● Provides framework for judging performance
● Motivates managers and other employees
Challenges of Budgeting
● Mismatch in incentives between different
levels of management
● Time consuming
Variance Definition
is the difference between actual results and expected performance (budgeted performance)
Unfavorable Variance
has the effect of decreasing operating income, relative to budget
Favorable Variance
has the effect of increasing operating income, relative to budget
Static Budget Variances
The full variance between the static budget and the actual budget
Flexible Budget
calculates budgeted revenues and costs based on
the actual output during the budgeted period (and prepared at the end of the period)
A flexible budget represents the hypothetical budget a company would have used if it could predict sales/output exactly
Allows managers to view variances through two separate lenses – a flexible budget variance and a sales-volume variance
Sales-Volume Variance Definition and Formula
is the difference between a flexible budget
amount and the static budget amount
𝑺𝒂𝒍𝒆𝒔 𝑽𝒐𝒍𝒖𝒎𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕 − 𝑺𝒕𝒂𝒕𝒊𝒄 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕
Flexible Budget Variance Definition and Formula
is the difference between actual results and
the corresponding flexible budget amounts
𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑨𝒎𝒐𝒖𝒏𝒕 − 𝑭𝒍𝒆𝒙𝒊𝒃𝒍𝒆 𝑩𝒖𝒅𝒈𝒆𝒕 𝑨𝒎𝒐𝒖𝒏𝒕
Price Variance Definition and Formula
is the difference between actual price and budgeted price
𝑷𝒓𝒊𝒄𝒆 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑷𝒓𝒊𝒄𝒆 − 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑷𝒓𝒊𝒄𝒆 ∗ 𝑨𝒄𝒕𝒖𝒂𝒍 𝑸𝒖𝒂𝒏𝒕𝒊𝒕𝒚 𝒐𝒇 𝑰𝒏𝒑𝒖𝒕𝒔
Efficiency Variance Definition and Formula
is the difference between actual input quantity
used and the budgeted input quantity
𝑬𝒇𝒇𝒊𝒄𝒊𝒆𝒏𝒄𝒚 𝑽𝒂𝒓𝒊𝒂𝒏𝒄𝒆 = 𝑨𝒄𝒕𝒖𝒂𝒍 𝑸 𝒖𝒔𝒆𝒅 − 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑸 𝒖𝒔𝒆𝒅 ∗ 𝑩𝒖𝒅𝒈𝒆𝒕𝒆𝒅 𝑷𝒓𝒊𝒄𝒆
